Just briefly… I did a practice defence for my thesis yesterday, was certainly interesting, and got to listen to a whole lot of other entrepreneurship-students (and potential entrepreneurs) on their own thesis-topics. Why I love universities is, of course, because of all the smart people I meet, but also because there usually isn’t a confidentiality agreement attached to our conversations, which means I can brainstorm about it openly with you.

The one thing I came away with was that networking is in… “Hah!” you say, and I wouldn’t blame you. With the rise of social networks and its media attention, of course it’s “IN.” No, but what I mean is that about 70% of the thesis-topics I heard being presented yesterday, were in some form or fashion centred on networking. And I can’t remember it being so dominating a topic before.

As was mine, incidentally, being in part about incubation and innovation systems, and how to improve the connection between tech-startups and investors, but there was one thing I didn’t look at, which was: Weak ties, strong ties, and their implications. I won’t explain it in great detail now, if interested, you should definitely read this pdf, I just uncovered, by Mark Granovetter, the originator of that theory and how to measure (!) it.

The idea is that we are surrounded by possible ties, some of them non-existant and potential, some of them strong, meaning that we meet frequently and that psychic distance is low, some of them weak, meaning that we see them rarely and that they are perhaps based on less emotional factors. If you’re in a university environment, it’s of course easy to imagine that you have a lot of strong ties. As everyone enters their careers, your ties to to each other become weaker and weaker. The same, to some extent is happening on this blog: some I have stronger ties with than others, simply because of the frequency of interaction. Of course, I’m hopefully a not-to-weak tie to all of you on this blog

Regarding the power of weak ties, Granovetter also writes:

The macroscopic side of this communications argument is that social systems lacking in weak ties will be fragmented and incoherent. New ideas will spread slowly, scientific endeavors will be handicapped, and subgroups separated by race, ethnicity, geography, or other characteristics will have difficulty reaching a modus vivendi.

In other words, strong ties aren’t everything either—they, rather, lock you into a clique and prevent ideas from spreading and changing the world!

The strength of ties & funding

Some things I learned yesterday, was that networking and its strength has certain implications in areas pertaining to funding and sales. One student did his thesis on the Greek semi-conductor industry and how it was funded. He found that (my phrasing):

strong ties are important for finding early-stage funding, like friends & family. But that weak ties are actually the predominant factor in finding funding from VCs and similar. His opinion is that those investors make their decisions not on emotions, but on business-reasons. A connection certainly helps, but is not the primary decision-maker.

The strength of ties and sales

If you ever worked in sales, you know that it’s often not really a job focussed on relationship-building. Rather it is about maximising turnover, which can best be achieved by selling to as many people as possible in a short period of time.

Another student did his thesis on how the social environment of startups affects their sales strategies. He interviewed three independent ICT startups and three, which were located in incubators, and found that the first group was much more focussed on developing their sales-force, while the latter group depended much more on the ties it had with their respective incubator, often finding their first customers within, one even supplying the incubator with software. Kind of scary, I think, this co-dependency in the latter case.

Strong ties were an important factor in business development, which were more intense relationships between businesses, trying to get a larger project off the ground. Sales, in general however, relied mostly on NO ties, aka cold approaches to customers. So if you want a job in sales, that’s kind of what to expect.

Thoughts and questions

While I dig theses a lot for their practical research alone—it sometimes reads like a section of a business-plan, and I have used it before to research an industry—we are obviously dealing with theories that are generalised across whole populations. But it seems like strong ties are actually not a very important factor in either getting funded or making a sale.

So some questions to you…

• How do you feel about networking after hearing this?
• Can you provide counter-argument, where a strong tie to a person actually improved your career? Ok, wives, girlfriends, boyfriends, and husbands should definitely be left out of this
• Are there other areas, apart from funding and sales, where either strong or weak ties are better?
• How often do you use contacts-of-contacts on LinkedIN or otherwise for professional reasons?
• Can you provide some Best Practices in regards to “Weak-tie management”?

I look forward to your answers!

Vincent

P.S. I asked a friend to send me the names of these students. I’ll try to fill them in later.

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It’s funny! Recently, 37signals’ David Heinemeier Hansson gave an interesting talk on finding a business-model for your start-up. He said something along the lines of “It’s no rocket-surgery!” Well, what I’m about to speak of is in fact rocket surgery.

As some of you may know, I wrote a thesis a while back on high-tech start-ups, their strategies of finding funding, and how they interrelated with incubators, a key-component in the innovation-system for high-tech start-ups. As it turned out, not all the start-ups I interviewed were high-tech, which showed some interesting differences in ambition, funding-need, and funding-strategy, but also not all the incubators, I looked at, were focussed on high-tech.

For some, it was a conscious choice; ESI, the ESA-incubator, faces the unfamiliarity in the market with space-technology, and their focus is to promote the utilisation of space-technologies, which is very-very different from the development of space-technologies. For instance, you can use materials or mechanisms used in space-tech in creating products like bikes, which obviously carries far less risk and development-times.

With high-technology, it’s all about making life a little easier, because the market is simply not able or willing to carry the technology- and market-risks that companies (to be) carry in this segment. Of course, this is a problem with entrepreneurship in general. For instance, back in the day, the first *official* VC-fund was American Research & Development (ARD), which collected funds, not from a limited set of institutions and for a limited time-frame, as is common practice today, but instead just opened itself up to common shareholders. Since high risk and high reward are correlated, it attracted a lot of attention, and eventually lawsuits followed from people that felt cheated (most often by some investment-adviser collecting his commission) when the risks proved true. And then VC-funds became more conservative, and less and less commercial money went towards highly risky ventures, like e.g. Space.

Today, most VCs prefer there to be no technology-risk, and many would also prefer for there to be no market-risk either (which translates into a company already having customers, which is generally good advice, but doesn’t work for all companies).

Back to incubation. I consider ESI a medium-tech incubator, and it does take measures, both on the technology-side and the investment-side, to make life a little easier for both start-ups and investors. As opposed to the Erasmus Medical Centre (EMC), which I consider a very high-tech institution, and acts accordingly. Why is it high-tech? Medical patents last around 15 years. Yet development can cost billions, the risk of failure is high, approval from regulatory institutions can take a long time, sometimes bringing the whole process to about 10 years of development-time. So not only is the chance of success low and the cost high, but you don’t have much time to collect the reward!

How the EMC works is like any high-tech institution. Scientists develop a process or product, it is part owned by them and part owned by EMC. Actually, it is very much owned by the EMC, though I won’t reveal the exact percentage. But considering the possible reward is huge, even a small percentage will set that inventor up for life. The EMC basically has complete freedom to do with the technology as it pleases. Often, it will license the patent, sometimes it will sell it, and sometimes it will decide to start and incubate a company.

In this case, still, it holds complete control. The inventor can decide to take part in that process, but essentially the EMC chooses who runs it. It also set up a seed-fund with banks and VCs, of which it also collects part of the rewards. Nice, no!?

Compare that to the ESI. The ESI usually licenses its technology, fairly freely from what I can gather. Their objectives are different, they want to educate the market. They don’t own equity in firms, though obviously there is a licensing agreement in place somewhere. When I interviewed them, they were planning to do something to make seed-funding for start-ups easier, but at the time of my working there, it was basically all left up to me and my partners.

From my research, I understand that the way incubators behave, very much depend on the objectives of their stakeholders. The objectives of the EMC and the ESA are very different. The EMC creates technologies that are meant to be commercial, and is also a cornerstone of Dutch innovation. The ESA creates technologies that are used in public programmes, licenses it to partners, but is also fighting an uphill battle as far the public’s and business-world’s perception of space-tech is concerned; it is simply too abstract for many to care, which raises questions about whether programs like the € XX-million space-toilet should really exist. Of course, when you bring space-tech *to earth*, that changes the picture somewhat.

Incidentally, there are very few successful independent incubators, simply because society considers it unethical for an incubator to exist—either because they don’t understand the kind of service that incubators can provide (nor is there a real quality-guarantee), or because they consider their residents as sub-par to regular, independent start-ups—both topics for another day.

There’s definitely much more to say about this, including the role, I think, incubators should play in (funding) high-tech entrepreneurship, but I’ll leave that for another day.

P.S. I hope this sheds some light on why I still don’t see software (and webware) as high-tech (1 & 2) and why VCs like that world so much.

P.S.2 This also sheds some light (in my opinion) on the media-industry, which others and myself frequently write about on Tech IT Easy. Music is just another technology, with its production- and high marketing-costs, as well as high risks of failure, and the way record-companies deal with artists reminds me a lot of the EMC-model. Food for thought…

This piece was written by Vincent van Wylick, co-author extraterrestrial on Tech IT Easy. The image is courtesy of rocket-surgeons.com.

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